With demand for domestic trips rising combined with the halving of APD in 2023, airlines could benefit extensively, and recovery could be given a much-needed boost.
The cut in APD will be met positively by domestic airlines, especially those with larger networks. A £7 ($9.65) reduction in tax will allow carriers to reduce prices to further stimulate demand. Domestic routes received a boost this summer. UK airlines pivoted towards serving domestic destinations in response to an uptick in demand while international travel demand remained suppressed. With a wide network, UK travellers could be more willing to travel on domestic flights in the future once the tax reduction occurs. However, a demand increase would only occur if the cost savings were passed on to the customer in the form of cheaper ticket prices.
Domestic airlines will benefit
As previously mentioned, airlines with a large presence in the UK domestic market are set to benefit the most. APD has been criticised as holding airlines back from operating large fleets domestically, this news may unleash the shackles.
Logan Air, British Airways, and Eastern Airways have extensive domestic networks and are among the players who will benefit from the UK halving its domestic APD. Loganair will be a large benefactor, with the airline having filled the void left by Flybe during the pandemic. The industry has long lobbied for APD to be reduced, and the reduction could see some airlines offer additional routes as prices become more competitive to other forms of transport.
Furthermore, Flybe 2.0 could benefit. The high value of APD in the UK was cited as a major contributing reason as to why Flybe collapsed. A significant cut will offer more favourable operating conditions for the carrier when it relaunches.
Covid-19 has caused financial strain
For many UK travellers, their financial positions have changed in recent times. GlobalData’s Q3 2021 Consumer Survey revealed that 73% of UK respondents were ‘extremely’, ‘quite’, or ‘slightly’ concerned about their financial position because of the pandemic, highlighting the benefits of a reduction in APD.
Airlines could struggle to stimulate demand during the Covid-19 recovery period. With financial concerns high, a reduction in APD will allow carriers to lower prices and better meet the needs of budget-conscious travellers. Furthermore, affordability was ranked as the top factor by UK respondents when deciding where to go on holiday, with 48% of respondents choosing this factor as the most important.
Reducing APD on domestic flights could increase demand when the new rates come in for 2023. In two years’ time, international travel may be much more accessible for UK travellers. A reduction in the cost of domestic flights could help the UK travel market to retain some of the travellers that chose to holiday in the UK during the pandemic.